PRODUCTION FUNCTION

DR JNARANJAN MOHANTY
PMEC,BERHAMPUR
 Production Function

• A production function is a mathematical or graphical representation that

shows the relationship between inputs (factors of production) and the
resulting output.

• General Form:
• Q = f(L, K, …)
Where:
• Q = Quantity of output
• L = Labor input
• K = Capital input
• Other inputs (like land, raw materials) can be included as needed.
 Types of Production Function:

• Short Run Production Function – Some inputs (like capital) are fixed.
• Law –Law of Variable Proportion

• Long Run Production Function – All inputs are variable.

• Law-Law of Return to Scale
Difference Between Short Run and Long
Run Production Function

Basis Short Run Long Run

Period where at least one input is Period where all inputs are
Definition
fixed variable
Only labor is usually variable; Both labor and capital can be
Input Flexibility
capital is fixed changed
Time Frame Limited/Immediate term Extended/Strategic term
Related Economic Law Law of Variable Proportions Returns to Scale
Optimize output with limited Plan for capacity expansion or
Objective
flexibility contraction
Production Decision Focus on best use of variable input Decide optimal scale of production
Shows stages of increasing, Shows constant, increasing, or
Graphical Shape
diminishing, negative return decreasing returns to scale
 LAW OF VARIABLE PROPORTION
(Short Run Production Function)
• The Law of Variable Proportion states that when one factor of
production is increased, keeping other factors constant, the
marginal product of the variable factor will initially increase, then
eventually decrease.
• In other words:
As more units of a variable input (like labor) are added to a fixed
amount of other inputs (like capital), the total output (or product)
increases.
• However, after a certain point, adding more of the variable input will
lead to diminishing returns, where each additional unit of input adds
less and less to the total output, and eventually, it may even lead to a
reduction in total output.
Key Points:

• Initially, Marginal Product (MP) increases, leading to higher

efficiency.
• Later, Marginal Product (MP) starts decreasing, indicating diminishing
returns.
• Total Product (TP) increases but at a decreasing rate after a point.
 ASSUMPTIONS
• The Law of Variable Proportions makes several key assumptions:
• Constant Technology: The state of technology remains unchanged. Any
improvement in technology would obscure the effect of changing the variable
factor.
• Some Inputs are Fixed: The law operates under the assumption that some factors
of production are fixed, while others are variable. This is what allows us to
observe the changing proportions.
• Possibility of Varying Factor Proportions: It must be possible to vary the
proportion in which the various factors of production are combined.
• Homogeneous Factor Units: The units of the variable factor are assumed to be
homogeneous (identical) in quality and efficiency. If the variable factor units
differ, it would be difficult to isolate the effect of changing the factor proportions.
• Short Run: The law applies in the short run, where at least one factor of
production is fixed. In the long run, all factors can be varied.
 MARGINAL PRODUCT (MP)
• Marginal Product (MP) refers to the additional output that is produced when one
more unit of a variable input (like labor) is added, while keeping all other inputs
(like capital) constant.
• Formula for Marginal Product (MP):
𝑀𝑃=Δ𝑇𝑃/Δ𝐿,
OR

MP=TPL of L-TP of L-1

OR
Slop of TP curve

• Where:MP = Marginal Product ,TP = Total Product, L = Units of Labor (or any
variable input)
 Key Points about Marginal Product:

• Initial Phase: When more units of labor are added, the marginal
product may increase due to better utilization of fixed inputs.

• Diminishing Returns: After a certain point, the marginal product

begins to decrease, even though output still increases.

• Negative Returns: Eventually, adding too much of the variable input

can cause the marginal product to become negative, reducing total
output.
 Example:
• Total Product (TP): The total output produced by 5 workers is 100
units.

• Marginal Product (MP): If adding the 6th worker increases the total
output to 120 units, the MP of the 6th worker is:

MP=120−100/6−5=20 units
 AVERAGE PRODUCT (AP)
• Average Product (AP) refers to the output per unit of a variable input
(e.g., labor) when all inputs are used together.

• It is calculated by dividing the Total Product (TP) by the number of

units of the variable input (e.g., labor).

• Formula for Average Product (AP):

𝐴𝑃=𝑇𝑃/𝐿
Where: AP = Average Product, TP = Total Product (Total output),
L = Number of units of labor (or any variable input)
 Example

• Let’s say a factory employs 4 workers (L = 4) and produces 40 units of

output (TP = 40).
• The Average Product (AP) would be:
• AP=TP/L=40/4=10 units per worker
 Key Points about Average Product
• Rises Initially: When additional units of labor or other variable inputs
are added and the output increases efficiently.

• Peaks and Falls: After reaching its maximum point, the Average
Product tends to decrease as more units of input are added due to
diminishing returns.

• Relates to Marginal Product: When Marginal Product (MP) is greater

than Average Product (AP), AP is rising. When MP is less than AP, AP is
falling. When MP equals AP, AP reaches its peak.
 TOTAL PRODUCT (TP)

• Total Product (TP) refers to the total quantity of output produced by

a firm using a given amount of inputs in a specific time period.

• It represents the overall production level when a certain number of

units of a variable input (like labor) are combined with fixed inputs
(like capital or machinery).
 Formula for Total Product (TP):

• There is no fixed universal formula for Total Product because it

depends on the specific production function of a firm. However, in
general terms:

• TP=∑Output Produced by All Units of Variable

• TP=Average Product (AP)×Number of Units of Variable Input (L)

.

Example:
This table shows that TP initially increases rapidly, then more slowly, and
eventually falls

Units of Labor (L) Total Product (TP)

1 10

2 25

3 45

4 60

5 70

6 75

7 72
 Key Points about Total Product (TP):

• TP increases as more units of the variable input are added.

• Initially, TP increases at an increasing rate (due to better use of fixed
inputs).
• Eventually, TP increases at a diminishing rate (as fixed inputs become
overutilized).
• At some point, TP may start to decline if too much of the variable
input is added (leading to negative returns).
 LAW OF VARIABLE PROPORTION

Units of Labor (L) Total Product (TP) Marginal Product (MP) Average Product (AP)

1 10 10 10.00

2 25 15 12.50

3 45 20 15.00

4 60 15 15.00

5 70 10 14.00

6 75 5 12.50

7 72 -3 10.29
 EXPALANATION
• The relationship among Total Product (TP), Average Product (AP), and
Marginal Product (MP) follows a predictable pattern under the Law of
Variable Proportion.
• Initially, as units of the variable input (like labor) increase, TP rises at an
increasing rate, and both MP and AP also increase, indicating improving
efficiency—this is Stage I.
• As more units are added, TP continues to rise but at a decreasing rate,
while MP begins to fall and eventually equals AP; beyond this point, AP also
starts to decline—this is Stage II, known as the stage of diminishing returns.
• Eventually, adding too much of the variable input leads to overcrowding
and inefficiency; MP becomes negative and TP begins to fall, marking Stage
III or negative returns.
• This relationship shows how marginal and average productivity influence
total output and highlights the importance of using the right amount of
input to maximize efficiency.
 Explanation of the Stages:
1.Stage I (Increasing Returns):
1. TP increases at an increasing rate
2. MP and AP rise
3. Ends when MP = AP (around 4th unit)
2.Stage II (Diminishing Returns):
1. TP increases at a decreasing rate
2. MP falls but remains positive
3. AP also starts declining
4. Rational production stage
3.Stage III (Negative Returns):
1. TP decreases
2. MP becomes negative
3. AP continues to fall
 CRITICISM
• . Based on Unrealistic Assumptions

• Operates Only in the Short Run

• Ignores Technological Changes

• Difficulty in Measuring Input-Output Relationships

• Not Universally Applicable

• Ignores Economies of Scale

LAWS OF RETURN TO SCALE
DR JNANARANJAN MOAHNTY
PMEC,BERHAMPUR
 Law of Returns to Scale

• The Law of Returns to Scale explains how a firm's output responds

when all inputs (labor, capital, etc.) are increased simultaneously and

proportionally in the long run, when no factor of production is fixed.

 Assumptions
1. All Inputs are Variable
1. In the long run, factors like labor and capital can be changed in any proportion.
2. Proportional Change in Inputs
1. Inputs are increased or decreased in the same proportion (e.g., doubling both labor and capital).
3. No Change in Technology
1. The law assumes technology remains constant throughout the production process.
4. Homogeneous Inputs
1. All units of each input (e.g., each worker or machine) are identical in quality and efficiency.
5. Efficient Utilization of Inputs
1. Inputs are used optimally, without any waste or inefficiency.
6. Indivisibility of Inputs
1. Some inputs (like machinery) are indivisible and may be underutilized at smaller production scales.
7. Long-Run Perspective
1. The law is applicable only in the long run, where there are no fixed inputs.
8. Perfect Competition (Optional assumption in theory)
1. The market is assumed to have no distortions, such as monopolies or government intervention.
 Three Types
1.Increasing Returns to Scale (IRS):
1. Output increases more than proportionately to the increase in inputs.
2. Example: Doubling inputs → Output triples.

2.Constant Returns to Scale (CRS):

1. Output increases exactly proportionately to inputs.
2. Example: Doubling inputs → Output doubles.

3.Decreasing Returns to Scale (DRS):

1. Output increases less than proportionately to inputs.
2. Example: Doubling inputs → Output increases by only 1.5 mes.
 Mathematical Form:

If the production function is:

Q=f(L,K) ,And all inputs are increased by a factor of t, then:

If f(tL,tK)<tQ → Increasing Returns to Scale

If f(tL,tK)=tQ → Constant Returns to Scale

If f(tL,tK)<tQ→ Decreasing Returns to Scale

 ISO-QUANT
An isoquant is a curve that represents all the combinations of two
inputs (typically labor (L) and capital (K)) that produce the same
level of output. It is essentially the production function in graphical
form.
 ISO-QUANT

Labor (L) Capital (K) Output (Q)

1 10 100

2 5 100

3 3 100

4 2 100
 Increasing Returns to Scale (IRS):

Input Increase Output Increase

Labor (L) Capital (K) Total Output (Q) Type of Return
(%) (%)

1 1 10 – – –

2 2 25 +100% +150% Increasing

3 3 60 +50% +140% Increasing

4 4 100 +33.3% +66.7% Increasing

 Explanation:

• From (1,1) to (2,2): Inputs double (+100%), output more than doubles
(+150%).
• From (2,2) to (3,3): Inputs increase by 50%, output rises by 140%.
• From (3,3) to (4,4): Inputs rise by ~33%, output increases by 66.7%.
• Thus, in Increasing Returns to Scale, each proportional increase in
inputs leads to a greater than proportional increase in output.
Increasing Returns to Scale
 Constant Returns to Scale (CRS)

Input Increase Output Increase

Labor (L) Capital (K) Total Output (Q) Type of Return
(%) (%)

1 1 10 – – –

2 2 20 +100% +100% Constant

3 3 30 +50% +50% Constant

 Explanation:

• Inputs and output increase in the same proportion at every stage.

• Doubling inputs leads to doubling output, tripling inputs leads to
tripling output, etc.
• This illustrates Constant Returns to Scale, where productivity per
unit of input remains unchanged as scale increases.
Constant Returns to Scale
 Decreasing Returns to Scale (DRS)

Input Increase Output Increase

Labor (L) Capital (K) Total Output (Q) Type of Return
(%) (%)

1 1 10 – – –

2 2 18 +100% +80% Decreasing

3 3 24 +50% +33.3% Decreasing

4 4 28 +33.3% +16.7% Decreasing

 Explanation:

• From (1,1) to (2,2): Inputs double (+100%), but output increases by a

smaller proportion (+80%).
• From (2,2) to (3,3): Inputs increase by 50%, but output increases by
only +33.3%.
• From (3,3) to (4,4): Inputs increase by 33.3%, but output increases by
only +16.7%.
• This demonstrates Decreasing Returns to Scale, where the additional
output gained from adding more inputs decreases as more inputs are
added, signaling inefficiencies in scaling production.
Decreasing Returns to Scale (DRS)
 CRITICISM
• 1. Unrealistic Assumption of Proportional Input Change
• 2. Ignores Technological Progress
• 3. Assumes Perfect Divisibility of Inputs
• 4. Not Applicable in the Short Run
• 5. Difficulty in Measuring Returns
• 6. Ignores External Factors
• 7. Limited Use in Non-Industrial Sectors